The Black Box of Democracy: The Old and New Challenges of Political Finance

Distinguished attendees,

I’m very grateful to Stefan and V-Dem, for the very kind invitation to speak here, on an issue that is very close to my heart—political finance and its regulation. It is an issue that I have followed closely more than 20 years, in the course of which I have seen it move from the margins into the mainstream of political debates and political science, which is a good and interesting thing.

I only have 30 minutes or so, so I’ll try to do three things. First, I’ll try to go back to basics and say a word about why is it that political finance matters for democracy. Maybe it is a non-issue, and we’re wasting our time. But I suspect, as I think you do, that it does matter. Second, I’ll say a few things about some of the most pressing challenges that democracies have right now connected to Political Finance. And, finally, I will devote some time to what can be done about these challenges and the limits of what can be done. Throughout the presentation, I will resort a lot to the recent experience of Latin America, which I know rather well, and happens to be very relevant.

Let us start with the first point, why does Political Finance matter at all?

Let us say, for starters, that the use of economic resources is an essential ingredient for democratic competition. More than a malady of democracy—as it is often cast in public debate—campaign finance is part of the normal workings of democratic life. It is nonetheless clear that money is capable of inflicting significant distortions on the democratic process.

Unequal distribution of money has a direct bearing first and foremost on the ability of parties and candidates to effectively get their message out to voters. Secondly, money can distort not simply electoral fairness but political equality more broadly, by affording individuals and social groups a greater or lesser ability to further their interests and influence public policies. This is of critical importance for democracy. When political power is merely a mirror image of economic power, the principle of “one person, one vote” is rendered meaningless and democracy ceases to be, in the words of Elmer Schattschneider, an “alternative power system, which can be used to counterbalance the economic power.” Thirdly, the process of fundraising lends itself to quid pro quo arrangements between private contributors and public decision-makers or, at least, creates the appearance of lasting conflicts of interest for decision-makers. This is the angle through which political finance usually enters our public discussions.

"When political power is merely a mirror image of economic power, the principle of “one person, one vote” is rendered meaningless."

When there is a failure to regulate money in the political process, or existing regulation is ineffectual, it can jeopardize the legitimacy of democratic processes and practices, as citizens will perceive that elections and governments fail to reflect their demands and interests. The famous quote by the legendary politician from California, Jesse “Big Daddy” Unruh, “money is the mother’s milk of politics,” only tells one side of the story. The fact of the matter is that the milk he speaks of contains poisonous elements, which must be purged, or at least, brought under control; otherwise, they can destroy democracy.

So, what is happening with Political Finance?

The first thing that we need to recognize is that these are not new discussions. Anxieties about the role of money in democratic politics are very old. In fact, they have been amply discussed for over one century in some democracies, such as the United Kingdom and the United States. These arguments have led, over time, to a proliferation of regulatory efforts that have gradually become a standard feature of democratic systems all over the world. The effectiveness of these regulatory frameworks remains uncertain, and uncertainty partly owed to their extreme heterogeneity—which limits the emergence of cross-country findings—as well as to their very diverse levels of enforcement. In fact, and this is a point on which I will insist, there is growing awareness than one of the key problems in the regulation of political finance is the lack of proper implementation of many of the legal controls that political systems have introduced in the past few decades.

But those old concerns connected to political finance have been compounded in recent years by the emergence of phenomena that pose new challenges to democracy or lend old ones with renewed potency. A few of them deserve to be mentioned:

1. The emergence of economic inequality as a pressing global issue, one that threatens to hollow out democratic systems and turn them into instruments for the protection of the interest of the wealthy;
2. The global financial crisis of a decade ago, which evinced disturbing levels of corruption in some developed democracies or, at a minimum, a serious phenomenon of policy capture by small, highly organized, and very wealthy economic actors, often through campaign contributions;
3. The spread of globalization and, in particular, of financial flows that have made available enormous sums of money previously out of the reach of political actors at the national level, and which have also facilitated the growth of transnational criminal organizations, eager to penetrate political systems;
4. The pervasive deterioration in the quality of democracy, seen, in particular, in the weakening of checks and balances across the board, and in the growing willingness of many elected governments to subvert the democratic process to stay in power.

Hence, the current challenges connected to political finance are, in many ways, more pressing and more visible. It is not by chance that if you take pretty much all the high-level corruption scandals in Latin America over the past few years, in all of the political finance irregularities feature prominently. The most conspicuous of those is the Odebrecht affair, i.e. the remarkable network set up by one of Brazil’s construction giants to secure public works contracts all over Latin America and parts of sub-Saharan Africa through the bribing of public officials and illicit funding of campaigns. So far, the case has left a trail of accusations and prosecutions in Argentina, Brazil, Colombia, Ecuador, Dominican Republic, El Salvador, Mexico, Panama, Peru and Venezuela. Odebrecht is, in turn, a spin-off of the massive Lava Jato (Car Wash) case, a complex story of collusion and corruption at the highest levels of Brazilian business and politics, uncovered in 2014. Among many plots and sub-plots, Lava Jato involved the construction firms’ efforts to set up a cartel to secure Petrobras’ (Brazil’s state-owned oil firm) contracts through bribes, and to divert three percent of their value to slush funds that finance parties across the political spectrum.

The Brazilian case is not really exceptional. Political finance-related scandals keep popping up in countries as diverse as Israel, France, South Korea, Chile, etc. And let’s not get started with the United States, where the disturbing role of money in subverting democratic politics is possibly more glaring than anywhere else. And in saying this, there is a lesson that is very important to note: no democracy, no matter how mature and rich, has managed to solve completely and definitely the challenges of political finance. This truly is a global challenge for democracy.

"No democracy, no matter how mature and rich, has managed to solve completely and definitely the challenges of political finance. This truly is a global challenge for democracy."

This is a set of problems that, in some ways, has proved intractable. It is true that, as I mentioned before, over the past four or five decades nearly all democracies have introduced measures to regulate political finance. But to this day we still have a very limited and tentative sense of what works, where, and for what. The menu of regulatory options is huge, and ranges from the ban on different sources of campaign income, to spending caps of varying severity, a plethora of laws to demand financial transparency from parties and candidates, diverse methods to punish violations to the law, and last but not least, the provision of public funding to parties and candidates in diverse modalities. Indeed, public funding has become, by far, the most widely adopted method to regulate the influence of money in politics. All these measures admit innumerable permutations that make it exceedingly difficult to tease out the effectiveness of specific policy measures.

The truth is that, regardless of their lofty intentions, most of these regulatory efforts have been severely undermined in practice. First and foremost, they have been weakened by the lack of effective enforcement of the controls that are in the books, which is one of the key problems—arguably the key problem—in political finance, throughout the world.

The failure to enforce not merely deprives of meaning the efforts to legislate in this area, but actually is one of the causes of the widespread cynicism that pervades discussions about the role of money in politics. Often, this failure is designed into the reforms that are enacted, either as a result of poor drafting of the norms, the absence of robust sanctions, or the reluctance to endow the enforcing authorities with adequate prerogatives and resources. When it comes to political finance, impunity is the elephant in the room. Don’t take my word for it. The Odebrecht affair is revealing: 17 out of 18 countries in Latin America ban, from a long time ago, campaign contributions of foreign origin. Mr Marcelo Odebrecht and his accomplices never got the memo. The plain truth is that it is only in a handful of countries where it is possible to know who funds politics. In most countries, political finance continues to be a black box.

"The failure to enforce not merely deprives of meaning the efforts to legislate in this area, but actually is one of the causes of the widespread cynicism that pervades discussions about the role of money in politics."

It is, in fact, an increasingly dark box. Globalization is making the control of political finance an exercise in chasing ghosts. It is important to understand the implications of this—among the rise of crypto-currencies, the global nature of organized crime and the pervasiveness of financial instruments that escape the control of the most sophisticated regulator, we may soon reach the point where our only opportunity to regulate the role of money in politics will depend on controlling the expenses and not the income of political actors.

Here I will like to spend a minute talking about the dangers connected to organized crime and political finance, which are very real in many places. This is one of those phenomena in which the global meets the local. For many reasons, the threat to the political process derived from the participation of organized crime in political finance is much more fundamental than any pathology derived from the financial involvement of legitimate business interests in campaigns. A few years ago, along with other researchers, I put together a volume on the links between organized crime and campaign finance in Latin America and a couple of European cases, Italy and Bulgaria. And one of the most important findings from our cases was the critical importance and vulnerability of the local level.

From the standpoint of organized crime, purchasing influence or capturing institutions at the local level is cheaper and less conspicuous and frequently is exactly what you need. If you’re a drug lord, you don’t need to have the Minister of Public Security in your payroll, just the local police chief; not the Minister of Finance, but the head of the local customs office. Or better still the local mayor that appoints the police chief and the customs officer. Moreover, legal controls over political finance rarely reach the local level. As does the control exerted by the press, which tends to pay little attention to local races. And the press that does usually has very limited investigation capabilities, and is easily subject to intimidation. At the local level, the combination of incentives for the political intervention of organized crime and non-existent legal and social controls over political finance is a toxic one. This is no speculation—it is rather what you find, over and over, in places like Colombia, Mexico, Central America and, almost certainly, Afghanistan and South East Asia.

So, yes, globalization and the technological changes that come with it have unleashed forces that make it increasingly difficult to control political finance. But they have unbound other forces as well, connected to the role of digital technologies. And here, I think, is one of the most interesting stories about political finance, one that we see unfolding before our eyes, particularly in the United States. There, on the one hand, we are seeing the enormous distortions created by extreme inequality in the funding of campaigns, particularly after the controversial decision by the US Supreme Court in Citizens United v. Federal Election Commission, in early 2010, which did away, in the name of freedom of speech, with limitations long observed on the participation of private companies in financing independent expenditures in favor of or against one of the parties or candidates in the contest. And now we have the extraordinary case of Michael Bloomberg becoming a viable candidate on the basis of his unprecedented capacity to spend money out of his own pocket, $300 million so far, before he’s even contested a single primary. But, on the other hand, we are also witnessing –first through the Obama campaigns and now, much more clearly, through the Sanders campaign-- the enormous potential of the Internet for democratizing campaign financing by mobilizing millions of small donors. At last count, the Sanders campaign has managed to attract in this election cycle $110 million dollars and over 5 million donors, each making an average contribution of $18. This is a truly remarkable change, as is also the role of digital technologies as instruments to facilitate social control over political finance, an issue to which I will return later. It is impossible to predict, today, which of the two influences on political finance, one plutocratic, the other democratic, will ultimately prevail. If you watch the debate in the U.S., you get the impression that the plutocratic impulse will crush any opposing force. I’m not so sure—while the legal interpretations of the First Amendment of the US Constitution are reversible, technological change is not. That should give us a glimmer of hope.

Our current political landscape is not just defined by globalization and immense technological changes. Sadly, it is increasingly defined by the deterioration in the quality of democracy. This is also having implications for political finance. Indeed, in this age of democratic backsliding and expansion of hybrid regimes—i.e. regimes that cloak an increasingly authoritarian nature under the thin robes of election and barely adequate checks and balances—the issue of the abuse of state resources to fund campaigns has become serious and pervasive. This affects in dramatic ways electoral fairness, entrenching incumbents and corrupting the political process in many countries around the world. This is one of the most difficult issues to deal with in the field of political finance. And there is legal as well as illegal abuse of resources, the latter being, paradoxically, more clear-cut and easier to denounce. Legal abuse, related to the deployment of the powers of incumbency, is more subtle and widespread, and therefore requires more sophisticated methods to counter it. Beyond the legal controls that may be introduced to deal with this, the role of civil society and election observers in denouncing these abuses is key.

I could go on, but this should be enough to give you a hint of the enormously complex issues connected to political finance that all democracies are forced to grapple with in this day and age. No wonder we all feel a bit at a loss as to how to deal with them. But try we must, knowing full well that there are limits to what we can achieve.

We thus come to our third point, what to do about all this.

It depends where you ask that question. If there is one thing we know is that there are no universal solutions to political finance challenges. The priorities and limits of political finance reform are strongly context-dependent. In some countries, issues connected to electoral fairness take precedence over problems related to transparency or integrity. Policy options which are available in some contexts –think, for instance, of spending caps—are simply out of the question in others. The role of electoral systems and courts, to name but two factors, condition the range of possible routes for any reform. Moreover, even in the same country political finance priorities may change over time as a result of scandals or as the by-products of reforms of other aspects of the political system. Disseminating good regulatory practices in the field of political finance is important, but even more important is to examine critically policy options and match them with the political context in which they are to be implemented and with the real –as opposed to the presumed—problems that they are meant to solve.

"Disseminating good regulatory practices in the field of political finance is important, but even more important is to examine critically policy options and match them with the political context in which they are to be implemented and with the real—as opposed to the presumed—problems that they are meant to solve."

Before going into specific routes for political finance regulation, let me express some points of caution.

The first one is that we ought to be careful not to overestimate the impact of political finance in the loss of trust in democratic institutions that we are witnessing. I say this because there is a tendency of ascribing to political finance a greater explanatory power—particularly when it comes to democracy’s woes—that is warranted. I think the drivers of the decline in political trust are very profound, and will be among us regardless of what happens with political finance. There are very structural issues of inequality that are fundamental to understand the loss of trust; the myriad ways, not just political finance practices, in which money slants the political system in favor of certain interests. There is also the widespread perception that the fate of people, communities and countries is being shaped by forces that are outside of anyone’s control. There is the role of the media in depriving political leaders of the aura of mystery and solemnity that protected them in times past. These days, political leaders bear the full force of Montaigne’s old dictum: “No man is a hero to his valet.”  The 24-hour news cycle almost inevitably cuts leaders to size. Hence, I have the impression that the loss of trust is a story with a lot of culprits that have relatively little to do with political finance. The key is that political finance offers a very attractive and simple explanation to all sorts of political ills.

I’m not saying, of course, that political finance has nothing to do with the loss of political trust. I’m saying something a bit more subtle. There is an asymmetry at play here. A bad system of political finance, riddled with scandals and shenanigans, can demolish trust in democratic institutions, but a good system does next to nothing to improve trust. Even from the much narrower standpoint of preventing corruption, the regulation of political finance is less relevant in practice than other factors, such as the transparency of public procurement.

In any case, we ought not forget that the impact of political finance on corruption and, more generally, on levels of trust is likely to be different in different contexts. And here, I would like to suggest to you a testable hypothesis: I strongly suspect that political finance is less relevant as a distortion of the public interest the greater the level of plain corruption—if you can easily bribe public officials directly, why on earth do you need to contribute heavily to campaigns? This means, for instance, that for the purposes of integrity and trust political finance matters less in Nigeria than in Costa Rica, and less in Costa Rica than in Sweden.

My second point of caution is about the limits of political finance reform. It is essential that we take a sober view of political finance reform. Political finance reform will not bring forth the New Man that Che Guevara dreamt about. Political finance is no more than an exercise in damage limitation. In capitalist societies, the political power of money exists regardless of how campaigns are paid for. Moreover, money in politics follows a hydraulic principle—it moves towards the empty spaces. I think that the only realistic goal of political finance reform is to correct the worst abuses and to inoculate the system against the worst dangers in terms of integrity and fairness of the political process. It is about preventing the naked purchase of public decisions, the penetration of organized crime in politics, the gross abuse of state resources, vote buying. But the drafters of political finance rules ought to be under no illusion that they will clean up political once and for all. Political finance reform is an unrewarding endeavor. The absence of regulation breeds widespread distrust with the political process. If the regulation is bad or incomplete, we will reap disappointment with the results and mistrust of the motives of politicians. If the regulation is good, it will almost inevitably yield a harvest of scandals and widespread cynicism, as the post-Watergate regulatory experience in the United States can attest. So, political finance reformers may fail even when they succeed. Moreover, political finance reform is a field littered with unintended consequences. More than in most realms, in political finance the road to hell is paved with good intentions. In sum—take a deep breath and admit that political finance reform can only have a marginal impact in controlling the inherent power of wealth in the political arena.

My third word of caution is about the state of our knowledge of political finance. Let us be honest, the empirical content of most discussions on political finance is too poor to justify many of the policy prescriptions that are out there. Most of us have committed this sin to some extent. The truth is that, as a discipline, despite some progress in the past decade or so, comparative political finance is still in the Stone Age. More than anything we need truly comparable evidence, which is hard but not impossible to come by. In fact, we need to abandon the idea that doing hard empirical research on political finance is next to impossible. When we put together the volume on organized crime and political finance, an almost completely virgin territory, we did so on the assumption that a lot of relevant information is already on the public domain, as a result of journalistic investigations, congressional probes, court cases, etc. The assumption proved correct and the results were quite interesting and enlightening. Whenever the notion that doing rigorous research on political finance is impossible comes up, I recall that the same was said about doing research on the military and the fact is that over the years a thriving literature on civil military relations has emerged. But beyond digging out fact we also need agreement on basic concepts: What is state funding? Direct funding? Indirect funding? What are the boundaries of political finance as a field of knowledge? Undertaking very serious, and boring, methodological work is a need of the highest order if the field of comparative political finance is to develop, and if it is to yield fact-based policy prescriptions. Without such an effort, we will continue to make prescriptions in the dark, which in many cases do more harm than good.

"We need to abandon the idea that doing hard empirical research on political finance is next to impossible." 

And yet it moves, as Galileo reportedly said. There are a few assertions we can make, which have some tentative empirical backing. The knowledge that we have acquired suggest that there are a few regulatory options that tend to do more good than harm in most places in terms of mitigating the risks associated with political finance. The list of these measures includes:

1. Greater control over private funding, with bans mostly on anonymous contributions, financing from foreign sources, and contributions from legal entities (e.g., corporations, trade unions, and nongovernmental organizations).

2. A public subsidy system to ensure fair access for parties and candidates to adequate funding to finance their regular day-to-day operations and campaigns, a system, moreover, that provides incentives for compliance with other political finance controls.

3. Adoption of controls to keep campaign spending from skyrocketing, such as:
   
   1. Limits on the length of the official campaign season, particularly the period for political advertising;
   2. Caps on advertising in the media by parties and candidates; and
   3. Facilitating airtime for advertising on public and private television for political parties, making sure that at least some of the airtime is divided equally among contenders.

4. Establishing mechanisms of accountability, transparency, and disclosure of the financial management of parties and candidates, through measures such as:
   
   1. Making mandatory for all parties and at all election levels the figure of the “electoral agent,” i.e., an identifiable chief financial officer of the campaign, entrusted with the observance of campaign regulations;
   2. Establishing the obligation of political parties to periodically report their income to the election authority, including in-kind contributions (except for volunteer work);
   3. Legally requiring the media to disclose rates and discounts granted to all political parties and candidates; and
   4. Expressly granting the electoral authority the legal power to audit the financial statements of parties and candidates.
   5. Explicitly establishing the public nature of campaign finance information and, accordingly, creating mechanisms by which the press and the public can access the financial statements filed by parties and candidates as well as the findings of audits conducted by the electoral authority; and
   6. Publicizing a list of the main sources of income of every party and candidate and the findings of the audit reports issued by the electoral authority.

5. Establishing a graduated system of sanctions for the chief financial officers of political parties in the event of any violations of the rules in force. That system should include:
   
   1. Withholding of state subsidies;
   2. Establishing fines and prison sentences for the chief financial officers and authorities of the parties; and
   3. Dissolution of the party or removal from office of officials elected by popular vote as punishment for repeated and exceptionally serious violations.

Now, all this means little if we don’t start paying more attention to the effective enforcement of those political finance controls. We need a to undertake a renewed effort to increase the legal, human and financial resources at the disposal of overseeing authorities for the task of enforcing political finance rules. And also, it is crucial that, to the extent possible, all these regulations make it to the local level, which is the weakest link in terms of political finance corruption and, in particular, of the penetration of organized crime into campaigns. Partly as a result of the weak institutional capabilities to enforce laws, the local level has remained largely unregulated from the standpoint of political finance. This is a major risk for democracies around the world.

"We need a to undertake a renewed effort to increase the legal, human and financial resources at the disposal of overseeing authorities for the task of enforcing political finance rules."

But it is also important to understand that regulatory efforts should go beyond simply passing political finance laws. We must embrace a holistic approach to political finance regulation. And here the experience of Latin America once again is relevant. If you take a look at Latin America’s recent corruption scandals you will see that they are highly complex schemes, in which political finance fraud is only one element in a larger story of malfeasance. This explains Chile’s decision to embed its most recent political finance reform in a broader set of integrity-enhancing reforms, and the decision made by some countries—Mexico and Costa Rica—of relaxing of bank secrecy rules when it comes to political finance. If political finance rules are to be effective in protecting democratic institutions, their connections to other norms that lie in the periphery of political finance must be understood. The effective regulation of campaign finance is a part of an ‘ecosystem’ of integrity-enhancing rules, which also includes norms against conflicts of interest, rules with regards to lobbying activities, asset-declaration provisions, reforms to banking and taxation secrecy rules, changes to rationalize parliamentary immunity norms, protections for whistleblowers, and, crucially, freedom of the press. If fighting impunity and preserving the integrity of public institutions are the ultimate goals, all these rules must be designed and enforced in a concerted way.

Last, but certainly not least, we must also involve civil society and the press, and leverage digital technologies to facilitates different modalities of social control over political finance. One route that has proven particularly promising is the development of digital applications to simplify access to political finance information. One particularly successful example from Latin America is the development in Colombia of the digital application Cuentas Claras (Clear Accounts) by Transparency International’s national chapter, Transparencia por Colombia, with the support of the United States-based National Democratic Institute (NDI). The application allows parties and candidates to report, in a standardized digital format, their income sources and expenses, generating in the process an online database (with information per party, candidate, donor, type of income source, type of expense, among other categories) that citizens can easily consult. Cuentas Claras was donated to Colombia’s National Election Council, which adopted the application as its official reporting tool in 2010. In 2013 the electoral authority made its use by parties and candidates compulsory. Currently, its use among political actors in Colombia is nearly universal. This kind of effort offers a very promising avenue for watchdog groups to have an impact on improving political finance transparency levels. Developing these and other kinds of digital applications is a low-cost affair. This being so, spreading the development and adoption of these applications also offers a potentially rewarding route for international cooperation agencies interested in promoting integrity-enhancing policies.

Whichever reforms are adopted, the most crucial element is that they be backed by the resources required for strict implementation, the willingness to review them when their inevitable shortcomings crop up, and a realistic understanding that no campaign finance system—no matter how sophisticated—is capable in and of itself of guaranteeing the absolute integrity and transparency of political activity.

It is crucial that social and political actors, domestic as much international actors throughout the world tackle this agenda seriously and urgently. The role of money in politics must be effectively regulated. As Michael Ignatieff has pointed out, “(n)o matter what the (U.S.) justices may say, money is not speech. It’s power”. And power needs to be subject to limits if democracy is to remain a democracy.

Thank you!